Looking for growth

The fallout from the ongoing eurozone crisis and the need for a more proactive approach in finding new business were central themes at GTR’s annual trade credit insurance roundtable.


Roundtable participants

  • Joe Blenkinsopp, deputy global head of political risk & trade credit, XL
  • Will Clark, head of UK, trade credit, Chartis
  • Olivier David, Head of Special Products, Atradius
  • Kevin Godier, GTR contributor (Chair)
  • Robert Michael, head of business development, trade credit, Aon Risk Solutions
  • Rupert Murray, executive director, credit and political risks, Arthur J Gallagher International
  • Lucas Neckermann, commercial director, UK & Ireland, Euler Hermes
  • Alex Paton, head of underwriting, Equinox Global
  • Ewa Rose, managing director, trade credit division, Markel
  • Richard Talboys, head of trade credit & financial solutions, Willis
  • Grant Williams, risk director, Coface UK & Ireland
  • Trevor Williams, head of credit & surety, Europe, QBE


Godier: How is the ongoing eurozone crisis affecting your industry?

Williams (Coface): It’s certainly impacted us in the UK. We believe that our review activity has been more active in the market and has possibly brought some reluctance to place business with us, because of uncertainty about what we may do with other markets. Some of the feedback we have had is that there is concern over the approach that might be taken by the industry as a whole over Spain and Italy. I think there is concern over how we would react, in terms of limits, if there is more negative news coming out.

David: We have seen an increase in the implications of non-payments across the zone, but nothing really compared to what happened several years ago, in 2008-2009, on the whole turnover multi-buyer side. In terms of the single risk market, the situation is still quite benign. Overall the risk appetite, acceptance and analysis are being affected by the environment, and we naturally incorporate this in our daily decisions.

Talboys: From the brokers’ side, there has been a surge of interest in Greece. However this has been tantamount to bolting the stable door after the horse has gone. There has also been a surge of interest from journalists asking questions about credit insurance in Greece, and also quite a lot of analysis of policy wordings. But until any exit occurs, and we know the terms of that exit, and how the currency translation into drachma happens, it’s difficult to give simple answers to questions such as ‘are we covered, yes or no’, when trying to match that with a policy wording. It depends on the contract and who you’re working with, and on the nature of the exit.

Neckermann: I can certainly confirm the rise in interest in our product. The global economic volatility results in two things for sure: One, prices are stabilising, and two, that people are inevitably waking up to the need once again for credit insurance. Euler Hermes had a rise in turnover of 8% in the first quarter across the group.

Rose: I think for us it’s different in the XL (Excess of Loss) market. Demand is more driven by growth opportunities, rather than the fear factor, so in 2011 there appeared to be a drop off in demand from corporate clients who can manage their debtor exposure pretty well themselves. They tend to want to buy our product for single exposure increases when their exposures increase due to the growth in their sales, or when they are expanding into new markets. It very much depends on the trade sector, given that many sectors are performing differently in this environment.

Paton: We’ve seen, on renewals, a lot of interest in non-cancellable products, because people are worried about whether cover will be available on clients in Southern Europe. We are of course cautious but we don’t want to take a blanket approach to those countries. We need to look at these markets on a case-by-case basis. We definitely see the return of political risk in Europe, and that capacity with underwriters. It’s key to get the structure right in the first place, and it’s becoming more challenging to get it right. On the client side, people want to know above all whether they are going to have certainty of cover, and are getting value for money. They may be short of cash as well, so at the end of the day, they want a return for their investment in a premium.

Murray: The insurers are on the whole maintaining cover for the right buyers in the eurozone. There is a certain amount of jitteriness naturally. But if your policy holder has the right relationship, then cover has been maintained. At the same time the amount of business being done with for example Greek customers has reduced anyway, so the demand for cover has slackened off. It remains to be seen whether this underwriting approach is carried on into other markets such as Spain.

Talboys: Brokers are seeing that the insurers who are most involved are communicating more and trying to avoid the negativity of 2008-09. We are getting phone calls about individual exposures, and are looking deep at the real need against the theoretical one. Communication is much, much better. Obviously there are certain withdrawals we are seeing, where some insurers are coming out of certain trades. People now look carefully at what’s important to the relevant country, and which business will receive priority. So there is a lot more considered analysis rather than the big sledgehammer approach saying ‘let’s get out’.


Godier: How do claims and loss ratios look this year?

Williams (Coface): Talking to some of the reinsurers over the last couple of months, they were expecting 2011 to be the bottom of the loss ratio curve, and for claims to start creeping up again.

David: After two benign years we are coming back to a more normal, average year, but nothing dramatic like in 2008-09.

Williams (QBE): It’s lumpy, and so very difficult to predict at the moment. The start of the year saw an increase in insolvencies, many high profile, which seems to have slackened off now. We haven’t seen a significant number of large losses although there has been a substantial market loss on the petroleum side. If you take that away it appears to be mostly attrition at present.

Blenkinsopp: Historically the whole turnover trade credit market has always had a lower loss ratio in export business than domestic credit insurance. In the last 12 months, we have seen a slight change to that, as a result of eurozone losses. That emphasises the unpredictable nature of some of the things that we are going through. Nobody really knows where Europe is heading. People are afraid of that uncertainty.

Clark: I think the conversation is really about the contagion effect if Greece does exit. And for us, there is the ‘what impacts what’ question. You have bankrupt banks, holding up bankrupt states, which are holding up bankrupt banks. That equation has still to work its way through. I can comfortably say that we are not seeing much in terms of an uptick in claims over the last year. It’s nudging northwards slightly, but nothing compared to 2008-09. But this could change quite quickly due to a big severity loss, which could come along because of the unique factors that materialise in the eurozone.

Paton: We don’t really see an impact on claims ratios right now, but I predict that there will be more notifications, because the banks will be reducing their support for local companies as this plays out.

Neckermann: It’s perhaps a little clearer than has been suggested. I think the bottom of the curve was last year, and it’s a foregone conclusion that we will have more claims this year and will pay out more to our clients. Loss ratios will increase. That’s a pretty straightforward fact.

Talboys: Is that a reflection of the fact that everyone was writing more cover and being a bit more adventurous back in 2009-10, to try and get business back in?

David: The portfolios today are of a far better quality from what they were in 2008. Over the past two years people have been more careful in terms of what they were writing. So I would expect the losses to be more benign.

Clark: The ABI (Association of British Insurers) statistics for 2011 show historical high levels in terms of insured turnover. There is about £312bn at risk, as opposed to 2007-08, when the level was about £300bn. So there is more risk flowing through the existing programmes. Yet as an industry, we have seen the number of new clients decrease – to the tune of around 30% – since 2008-09. And the premium levels are actually below what they were before this crisis. The ABI stats say that in 2008 we had 14,000 policyholders, £344mn of premium, and £302bn of insured turnover. Today, we have 10,000 policy holders, £315mn of premium, and £312bn of risk.

Talboys: Does that reflect a weeding out of higher-risk policy holders, from higher-risk buyers?

Clark: I think it reflects that a number of clients opted for self-insurance, as well as the industry cutting some programmes out.

Blenkinsopp: And a number of clients have gone for the non-cancellable option, or the whole turnover excess of loss product, which is a perfectly valid alternative risk management structure.

Clark: You are right to say that the single risk market seems to have grown as well over the past couple of years. Clients have been a bit more selective about what they want to insure on the back of 2008-09.

Rose: And there is obviously the demand from the banking sector, which tends to be more for single situation cover.

Michael: And if you go back to 2008, the average rate cost was 0.113 %, and probably jumped up to 0.14% as a result of the crisis. If you take the 2011 figures, we are back to 0.11%. That does show that the market was historically soft in 2008 when the events of August took place. As a result of the crisis, many underwriter loss ratios exceeded 100% and rates increased. However, losses in 2010 and 2011 may not have been at the levels expected. Everyone is hungry for new business again. And so consequently rates are at the pre-crisis level. Did we ever get out of the crisis?

Williams (Coface): If you measure it by notifications, there has been a steady but undramatic increase in volumes since Q4 last year. Our issue is that although there has been a degree of clearout in terms of credit insurance clients moving carrier or electing to self-insure, banks have not seen the same levels of change in their loan books. Some of the problems have been avoided by debt rolling over, almost delaying the inevitable for some corporates. From the third quarter of this year, and through into the first half of next year, there is significant MBO debt to be refinanced, a lot of it in the UK. As credit insurers, we are all quite wary of where that might go.

Michael: One other thing in terms of the losses that we have also picked up is that whilst there hasn’t been the large loss, there has been a slight increase in severity, and there are a larger number of mid-tier losses coming along.

Rose: You are right that the ability and willingness of the senior lenders to refinance and roll over debt is getting less and less. I think all those factors are going to add up to more claims.

Williams (QBE): There is a lot of rhetoric at the moment about zombie companies which continue to survive because interest rates are so low. But what happens if interest rates go up? These companies will struggle to survive and we are likely to see an increase in insolvencies.

Clark: The benign interest rates make corporate Britain look a little healthier than perhaps it actually is. I have seen numbers that state that there is £1.8tn to be refinanced in the course of the next 18 months. When you look at where the banks are, that’s a big challenge for them.

Blenkinsopp: Given the lack of stimulus in the economy, it seems very unlikely that governments will increase interest rates severely. The IMF’s view is that Britain should actually reduce interest rates to zero.


Godier: To what extent has the non-cancellable, excess of loss model been embraced by the underwriting market and its clients?

Neckermann: The simple fact is that our industry is much larger than three whole turnover players, as is shown by the growth of some of the companies around this table. It’s completely undeniable that non-cancellable and excess of loss are product classes that appeal to a number of customers. After the crisis, as companies woke up and started building up their own credit departments and credit knowledge, they discovered that in just a few cases they “grew out of” the whole turnover market. The whole turnover players cannot just close their eyes to this, and hope that it goes away. On the other hand there is plenty of room for various players in various parts of the market. I think we can do a lot in the space for smaller companies, turning over less than £2-3mn, which is a completely under-served market.

Murray: The non-cancellable issue has partly been diluted by policy holders being reassured by limit withdrawal notice periods and the improved premium rates from those underwriters not willing to offer non-cancellable cover. People’s memories have been shortened by such incentives. In respect of Greece, where we are now seeing insurers withdrawing cover, there is STC (structured trade credit) side, which has performed incredibly well, in terms of honouring its commitments. So that attitude of whether we will or won’t pay claims is entirely dated.

Blenkinsopp: I completely agree that the non-cancellable market has performed strongly. In 2008-09 it paid out billions in terms of claims payables. The larger corporates and multinationals are certainly attracted to non-cancellable coverage, primarily because they have worked out that you have to communicate extremely well with your insurers at the outset, which they have to do anyway with their traditional whole turnover credit insurers, and throughout the life of the policy. Moreover, most corporates don’t want to make an insurance claim, they want to continue to trade. And if the insurer is concerned, you will find that most large corporates are open to accepting that large insurer’s advice not to continue trading in a difficult situation. So I think there is a hybrid developing, which is non-cancellable, and has a good solid communication base to it.

Michael: Joe has hit the nail on the head. The key thing we are talking about is communication in terms of reduced limits and some of the things that were going on earlier. I think it’s fair to say that in the market the communication this time around has been better. And this includes the non-cancellable market, which has paid out its claims and worked extremely well and efficiently. And that comes down to communication, communication, communication.

Talboys: I think we all agree that excess of loss works extremely well with the right client, which is one that undertakes the due diligence with the understanding of the need to demonstrate on the credit management side. But there is beginning to be a small trickle of non-cancellable offers for whole turnover policies, where we are seeing the kind of products that are shoved quickly out of the door, and which are understood by clients as cover certainty, without understanding the need for due diligence. That’s where the dangers lie.

Williams (Coface): There is this dangerous ‘pick and mix’ scenario where whole turnover products are going very much into this hybrid, and you get into a situation where the price isn’t reflecting the risk. You are giving bells and whistles and everything, for 0.001% of turnover as premium, and there is surprise when we want to review terms when the economy gets a bit rocky. There is definitely segmentation required, focusing on the sophisticated client that needs this type of product. The edges are becoming very blurred between non-cancellable and whole turnover.

Clark: 2008 was probably a time when the whole industry got tested, including non-cancellable programmes. We have benchmarked the loss ratios for those who provided, and those who didn’t, and there is really not a lot of difference. We certainly paid claims on the basis of non-cancellable limits. Trying to evolve the product as a hybrid, without really understanding that there are two different underwriting philosophies at work, is where we will do some damage across the product’s long-run evolution. But the one stat I do like is that when you actually look at your credit limits, and then look at where your client is in terms of exposure, the average is about a third, which shows that they have been managing that risk pretty well before we got to it.


Godier: What general trend has pricing taken, both in the second half of 2011 and in recent months?

Williams (QBE): There was a lot of talk at the start of the year about higher pricing from some of the monoline insurers, but we certainly haven’t seen it with the current competitive market we are seeing. It is a very strange market at the moment, with premium rates much lower than I expected them to be.

Paton: The pricing is not as high as we thought it would be at the start of the year. But I would say that compared to last year, when underwriters were giving away capacity for almost anything, people have now become much more careful in how they grant capacity. I would add that you can now achieve a good return for difficult risks.

Michael: One of the challenges is the lack of new business coming into the market. Everybody is chasing the same pool, whether they are renewals or pieces of new business that do come into the market. That’s creating the softening we’ve seen. How does the industry promote the product to bring more new-new uninsured business into the market?

Blenkinsopp: In the single risk market, there is plenty of capacity on a non-cancellable basis which is driving pricing downwards, favourably for the clients, for the better quality risks. But if the focus of that market is predominantly emerging markets, that’s a very different pool of risk, compared to the majority of the pool that the whole turnover credit insurers operate in.

Neckermann: Although it varies between new business and renewals, we do see stabilisation and we expect pricing to fall in line with the increase in risks, even if we shake our heads at some of the pricing decisions. One thing we shouldn’t do as an industry is to lull ourselves into believing that the market is growing just because prices are going up. That shouldn’t keep us from having prices that reflect the increased risk.

Rose: For good quality single buyer names the prices are extremely competitive, and there is an endless amount of capacity and willingness to write it at those rates. Lesser quality risks are better priced. By looking at innovative products and trade sectors that other people haven’t thought about, we have been able to generate good returns.


Godier: Reinsurers are very keen on pricing discipline across your industry. What is the current feedback from reinsurers?

David: They are very positive and supportive, from what I can see. We have been bringing them good quality risks for the past couple of years, and I think they are quite happy with what we are doing.

Blenkinsopp: The reinsurance game is very much about providing quasi-equity and support to the primary underwriters, and it’s a long-term game, in which there are no kneejerk reactions on pricing as long as the primary insureds have their underlying business model correct. In my view, the reinsurers will be very supportive of the vast majority of the business models around this table.

Williams (Coface): I have met two reinsurers in the last three weeks, and both were very comfortable. They both understand the market, recognise that they have had some good times, and both were braced for a challenging period ahead. But both of them commented that they were more concerned about other lines, than credit and political risk reinsurance.

Clark: Our return on capital has been pretty decent over the past couple of years. If you then clock the numbers forward and look at us from a capital perspective, I imagine that most of the businesses around this table look pretty healthy. Reinsurers are worried about severity risk, and there is obviously some concern about where the banks are and where Europe is. But in principle they are fairly comfortable and happy right now.


Godier: Where can new business come from?

Michael: There has been a certain lack of broking proactivity in hunting out new opportunities. We have also looked more at the sources of new business at Aon. There are probably six or seven sources which could be cold clients, networking, centres of influence, banks, existing property and casualty clients and so on. Also, when we go to see people, we make a bigger point of quantifying the benefits of credit insurance, and put some thinking around areas such as the impact on cash flow, profitability and ability to raise finance at a better rate. It becomes a strategic sale, as opposed to making just a pure commodity sale.

Rose: There is room for new solutions and we have to evolve as a market with alternative niche solutions. I would say the majority of our clients buy protection so they can get better financing terms on the back of that. That is a very big driver in terms of new markets and new business. The other thing which we are seeing a lot more of is captive solutions, more than I have seen in years. Again, companies just being a little more clever about how they transfer their risk and why they do it. Sophisticated solutions require very specialist wordings, which links into the length of time it takes to close a deal. But if that deal achieves the long-term goal for the client, then that business should stay with the industry for many years.

Paton: We see some new-new business, and we also see quite a lot of innovative structures. That could be a captive structure or a top up. Or it could also be more syndication, given that there are more players and more capacity in the market. What could once only be handled by one player can now be handled by two or three players, offering a better diversification of the risk and more capacity to insureds.


Godier: Is the industry sufficiently innovative?

Clark: Several things have become apparent. One is that the product will change over the course of the next five years, and become far more reliant on financing, perhaps as much as it is about risk mitigation. And if it can become more entwined at the upper end of corporate size, then in time it should gradually percolate its way downwards. New technology will also have its part to play. It’s amazing that we still have stamps which we use for documents. Investment in technology is something that we feel is important. It will cater better for clients’ needs, and will also open up a gateway for credit insurance, as well as act as an enabler with regards to information supply, so that we can make better decisions.

Neckermann: We are doing a few things to make sure that the core offering is spot on. Of course, we have the delayed effect clause now for risk reductions at Euler Hermes. Furthermore, just this month we have introduced what we call the customer line, a service line by which our customers can reach us. And 80% to 85% of the cases or thereabouts get an answer right away, regardless of issue. Communications is now a significant factor, especially with the rocky road ahead. You should expect to see some innovations from Euler Hermes over the next 6-12-18 months. But our industry can also profit enormously from outside ideas. One of the things I have done is to explicitly hire people from outside of credit insurance.

Williams (Coface): That’s a very fair point. I also think that we are highly fragmented even promoting the industry. I have done it for a long while, but you cannot help thinking that, as an industry, we have never collectively got together. Even in a crisis, we are just fighting one another to a certain extent.

Talboys: We don’t ever just put it in a pot to promote generic credit insurance.

Williams (Coface): I’m not familiar with all the stats, but if you think that it’s about 15% of all the potential corporate clients that are credit insured at the moment, then even if you increased it by just 5% or 10%, there is big potential for all of us.

Murray: But we have been talking about trying to get together as an industry to promote ourselves for at least the last 23 years. I know that Biba and ABI are discussing possible actions that can be undertaken by the industry, so perhaps we can get a joint and positive message out to our market place.

Talboys: The Biba conversation has been focused on ECGD (UK Export Finance) and small exporters. It is still looking back more at the 2008 credit crisis than it is looking ahead at the industry as a whole.


Godier: How about the regulatory backdrop? Is that affecting your business in terms of Solvency II and any other pressing issues?

Rose: I’m spending a lot of time with actuaries. The regulators seem to vary their interpretation, which brings opportunities and difficulties. Guernsey has come out and said it is not going to be tied by Solvency II, so that may drive more captive solutions. As part of a multi-line company, we are part of a much bigger spread of business lines.

Blenkinsopp: Likewise with XL, we are part of a multi-line insurance company and therefore there is a major commitment to getting the organisation ready to trade under Solvency II. I’m not sure that the immediate benefit to clients is completely apparent.

Rose: It has been said many times, but the insurance industry is different to the banking industry. We are much more about the long term, and have not been through the crisis that the banking has been through, so I think that the ABI should perhaps be pushing that aspect of our industry at the regulators.

Clark: I think that the question that both Solvency II and Basel III pose is: how do I use my capital more efficiently? Because Chartis and many other carriers have become single entities in Europe that just sharpens you up a little in terms of how you manage your capital. The good news is that the numbers that we are generating as an insurance line actually look quite positive, which is difficult to see when you only benchmark your results against other trade credit insurers. This has provided a positive outlook as far as capital is concerned and what our industry line means.

David: The huge short-term drain in resources is pretty negative for customers because these are resources that we cannot use to support them or invest to improve our service to them. Eventually the cost will also have to be transferred to the customers to keep our industry attractive to investors.

Talboys: Brokers are still hit by this. Obviously Basel III-compliant insurance wordings are a big issue, for our banking clients particularly. Also just simple FSA regulation for the broker, the amount of time that is spent complying with certain diktats to meet metrics that have absolutely zero point is ludicrous. Our front-line troops seem to be spending far too big a percentage of their working day on back-line functions.

Blenkinsopp: The change from Basel II to Basel III won’t be as exponential as the change to Basel II was, with its strong emphasis on looking at policy wordings. For those banks and corporates that want to use their capital most efficiently, the application of Basel III by banks should make the insurance products even more attractive, and begin to grow the market in a way that everyone around this table would like.


Godier: Is there any long-term concern that the major state-owned insurers such as Sinosure will compete harder for your clientele?

Blenkinsopp: This question touches upon the Berne Union’s attitude towards the so-called marketable risk area, covering trade payments of two years or less, and the extent to which this is distorted by state support and subsidy. Euler Hermes Deutschland officials have said that there should be a more robust use of shortening the tenor down to 180 days, because the export credit agencies (ECAs) are now so well-placed to help corporates with short-term credit insurance. I have always embraced competition as good and healthy, and the question is whether or not the commercial market is well-placed to fend off that ECA challenge. And to get it recognised by the ECAs that there is actually a very healthy commercial market well beyond a two-year maximum payment term, and out to ten years in some cases.

David: I agree. We support free trade and we support competition. We shouldn’t be afraid of Sinosure as long as there is reciprocity. This means that we would need to be free to also insure Chinese exporters. Sinosure would of course be welcome here, if we were welcome there. GTR